Flyingbird Learning Ltd. is a company located in Virginia. The company develops online training platforms for corporate clients and provides content support on a subscription basis. Suppose during the summer, you started a part-time job at this company. The company is considering upgrading the computers used by its graphic design department. The five computers being replaced cost $12,000 two years ago and now have a net book value of $4,000 based on using straight-line depreciation, a three-year useful life, and $0 salvage value. Your analysis indicates that you can likely get about $500 per computer if you advertise them online. The new computers being considered will cost $15,000 in total and will also have a three-year useful life, with an estimated salvage value of $0. The new computers each include annual licences for graphic design software for which the company is currently paying a total of $500 per year, per computer. Required: a) You prepared an analysis of the financial effects of keeping the old computers versus buying the new computers that ignored the $4,000 net book value of the old computers but included the potential salvage proceeds of $500 per computer. Your supervisor has politely told you that it was a mistake to exclude the $4,000 since it will have to be written off for financial reporting purposes if the company goes ahead and purchases the new computers. Your supervisor noted, “You should have included a loss of $1,500 in your analysis: the $2,500 salvage value ($500 × 5) less the $4,000 net book value to be written off.” Who is correct, and why? b) Your analysis also shows that under the option to keep the existing computers there are two opportunity costs: (a) the salvage value of $500 for each of the old computers, and (b) the $500 per computer in software licence cost savings that would have been realized if the new computers had been purchased. Again, your supervisor has politely told you that including these costs under the alternative to keep the old computers is wrong since in neither case are there any out-of-pocket costs incurred by the company. Who is correct, and why?

Flyingbird Learning Ltd. is a company located in Virginia. The company develops online training platforms for corporate clients and provides content support on a subscription basis. Suppose during the summer, you started a part-time job at this company. The company is considering upgrading the computers used by its graphic design department. The five computers being replaced cost $12,000 two years ago and now have a net book value of $4,000 based on using straight-line depreciation, a three-year useful life, and $0 salvage value. Your analysis indicates that you can likely get about $500 per computer if you advertise them online. The new computers being considered will cost $15,000 in total and will also have a three-year useful life, with an estimated salvage value of $0. The new computers each include annual licences for graphic design software for which the company is currently paying a total of $500 per year, per computer. Required: a) You prepared an analysis of the financial effects of keeping the old computers versus buying the new computers that ignored the $4,000 net book value of the old computers but included the potential salvage proceeds of $500 per computer. Your supervisor has politely told you that it was a mistake to exclude the $4,000 since it will have to be written off for financial reporting purposes if the company goes ahead and purchases the new computers. Your supervisor noted, “You should have included a loss of $1,500 in your analysis: the $2,500 salvage value ($500 × 5) less the $4,000 net book value to be written off.” Who is correct, and why? b) Your analysis also shows that under the option to keep the existing computers there are two opportunity costs: (a) the salvage value of $500 for each of the old computers, and (b) the $500 per computer in software licence cost savings that would have been realized if the new computers had been purchased. Again, your supervisor has politely told you that including these costs under the alternative to keep the old computers is wrong since in neither case are there any out-of-pocket costs incurred by the company. Who is correct, and why?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 13E

See similar textbooks